Yahoo CEO – Marissa Mayer; Model Price Report Card

I’m a fan!

She is a fresh face.  She is 38.  She is a mother.

Marissa seems to be doing bold things strategically and financially speaking that keeps Yahoo, the company, in the news.  She was appointed CEO of Yahoo in July 2012 and had just completed her one-year anniversary on July 16, 2013.  Since her arrival Yahoo’s share price has soared 70%.

She is also controversial.  Her latest controversy, appearing in the September issue of Vogue, spread out in a lawn chair – with her clothes on – though her knee length royal blue dress is sleeveless!

“But how is she doing, really?” is the question I ask myself.

So I dig into our Model Price database and pull out the following charts.

Theoretical Earnings versus 12-Month Forecast of Earnings per Share

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For convenience sake I have computed a ratio of the two lines so you can better view the relationship.

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What is Theoretical Earnings (TE) Again?

Simply stated the calculation of TE of any public company yields what one can call benchmark earnings or what the company should be earning, again in theory, given the capital structure of the company and the capital employed in the business.

Once TE is calculated, you can compare the result to the actual earnings (AE) of the company.  If AE is greater – which it usually is – the market gives additional valuation in the public financial markets for this differential between TE and AE.  If a company is dynamically increasing its AE with TE staying the same or marginally increasing over time, equity markets usually signal its approval of this expanding ratio by increasing the valuation of the company.  The antithesis is also true if dynamically TE and AE as a ratio is contacting, the equity market will take away valuation.

This should make sense to a lot of people.  In essence we are comparing a public company to itself in terms of its own benchmark earnings or Theoretical Earnings.  I like to think of individual companies as unique as fingerprints, each being individually different even though they may compete in the same industry.  CEO’s have a large influence over their own TE calculation in the way they manage their business and can have a direct impact on their company’s valuation, again this should make sense.

If you think my line of logic is sensible – on the concept of TE – and wanted to seek out more information on the topic you will be disappointed.  Unfortunately this financial concept (TE) is NOT taught in any business class, MBA or CFA program.  So by reading this blog you‘re ahead of the other financial professionals in terms of equity analysis.  TE analysis is embedded in our calculation of Model Price in case you were wondering.

Marissa is Increasing Actual Earnings (AE) but also Theoretical Earnings (TE)

If a CEO increases the size of their balance sheet (TE), their earnings should follow (AE).  To me this is an equivalent to depositing more money into a bank account.  More money in a bank account the more interest income received or in Yahoo’s case the more earnings per share created.

Marissa has done a great job increasing EPS after a year on the job, unfortunately what income gains she has achieved have come at a cost in terms of theoretical earnings yielding a negligible tangible benefit for shareholders.

But Yahoo’s Stock is up 70%

Yes, but when Marissa was appointed CEO of Yahoo there was a positive valuation gap between where the stock was trading and our calculated model price.  As you can see from our model price chart below shares of Yahoo had a potential 64% upside to our calculated model price.

See model price chart below

Yahoo! Inc. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Yahoo! Inc. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Granted Marissa has closed this valuation gap over the last year however critics credit most of performance from perceived value of Yahoo’s equity stake in Alibaba Group Holdings Ltd., the China-based ecommerce giant that is planning an initial public offering.  Irrespective of what the critics say, the valuation gap was closed on her watch and she should get the credit – remember I said I was a fan.

What to make of Marissa’s performance over the last year?

Unfortunately, I would say mixed, maybe B minus.  Over my business career, especially watching and observing through the filter of Model Price Theory (MPT), I have seen many charismatic and press savvy CEO’s come and go.  Strangely I find myself rooting for Ms. Mayer.   Why?  Perhaps of my perception of her being an underdog in the male dominated world of Silicon Valley has something to do with it.

Unfortunately math is math and I have seen too many times where CEO’s jack up theoretical earnings (TE) to increase actual earnings (AE) only to see AE disappear because of bad acquisitions – Marissa has acquired 17 technology startups – and failed strategic maneuvers.  She needs to get lucky with some of these acquisitions or maybe hit a home run with one of them to justify the TE growth over the last year.

Ms. Mayer has only been CEO for a little over a year with still 36% upside differential to our calculated model price, as of last night, as you can see with the model price chart above.  The low hanging fruit has been picked in terms of valuation pickup over the last year but there is still easy upside to capture for shareholders.

Admittedly it’s not difficult to keep tabs on Ms. Mayer, the business press and now the fashion press keeps her visible to her audience.  Hopefully she can back up this show with something more substantial (and differential) in terms of model price math.

As always will be interesting to follow!

P.S. Hedge fund manager Daniel Loeb took a position in Yahoo back in 2011 when Yahoo was trading around $13.50 a share.  He helped recruit Ms. Mayer as CEO of the company.  He sold 2/3’s of his position back to the company for $29.11 in the latter part of July of this year.  Critics didn’t like that Mr. Loeb seemingly got preferential treatment on the sale of his shares and blamed Ms. Mayer for this corporate action.  Strangely and maybe counter-intuitively this share buy back helps reduce our theoretical earnings calculation.  Interesting.  Maybe I was too harsh in my grading of Ms. Mayer.  Time will tell.

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